IMF Completes First Program Review and Financing Assurances Review Under Honduras' PRGF Arrangement

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Honduras' performance and the financing assurances review under a SDR 71.2 million (about US$104.3 million) three-year Poverty Reduction and Growth Facility (PRGF) arrangement approved in principle on February 18, 2004 (see Press Release 04/29) and effective since February 27, 2004. The completion of this review allows Honduras to draw a further SDR 10.17 million (about US$14.9 million), bringing the total amount released under the arrangement to SDR 20.34 million (about US$29.8 million). In completing the review, the Board waived the nonobservance of the performance criteria related to the approval of a package of financial sector laws before June 30.

"Honduras's performance under the PRGF arrangement has been strong.The economic recovery is gathering pace; the external position has strengthened, notwithstanding the impact of high oil prices; and anti-poverty spending has begun to rise. These favorable early results under difficult circumstances testify to the authorities' resolve in implementing their program and augur well for the economic outlook. It is now critical to build on these achievements to consolidate the hard-won stabilization and reform gains.

"The government's commitment to social consensus has played an important role in maintaining domestic support for the program—which has remained strong across a wide spectrum of society. Congressional support for reform has been a key and welcome element in the success of the program to date.

"Continued implementation of sound fiscal policies will be essential to sustaining the success of the program. In particular, this will require enactment of a 2005 budget that is in line with the program, followed by steadfast implementation of the budget in the course of the year. The support of congress in refraining from any unfinanced appropriations will play a vital role in this regard.

"Adherence to the revised teachers' wage agreement reached in July 2004 will be essential to the success of the program, and the development of a permanent teachers' wage policy is key to medium-term fiscal sustainability. Moreover, wage policy in other parts of the public sector will also need to remain consistent with the program.

"The central bank has sent a clear signal of its determination to preserve the important gains made in reducing inflation in recent years. Its plans for modernizing monetary operations are welcome, in particular, by strengthening monetary instruments and improving interest rate signaling. Successful implementation of these reforms will allow a progressive strengthening of the monetary policy framework.

"The four financial sector laws recently approved by congress are a significant milestone in addressing the weaknesses of the banking system. It is important that the new framework be implemented fully, as planned. Progress in financial sector reform is one of the trigger conditions for achieving the completion point under the enhanced HIPC Initiative—which Honduras aims to reach in early 2005.

"Other institutional reforms are also moving ahead. The important political and judicial reforms under way will contribute to reducing perceptions of corruption and improving the investment climate.

"Overall, Honduras's satisfactory performance under the PRGF arrangement is commendable. Continued implementation of the authorities' program should lay a strong foundation for durable growth and poverty reduction," Mr. Carstens said.